Deeds of Covenant

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GoldDigga

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My siblings and I want to help our parents out financially. They are both over 65, on a state pension and do not have any other income. I have been reading the info here on D.O.C and the tax reliefs that are available for both the Covenantor and the Covenantee.

http://www.citizensinformation.ie/c...liefs/deeds_of_covenant/?searchterm=covenants


There a number of points that are not very clear to me.

How do I calculate the tax relief for both parties?

They mention a reduction of interest relief by 5% on covenants for adults over 65, but also say that the total tax relief for the covenantor can not exceed 5% of their gross income less deductions. Can someone explain?

Can these payments be made monthly to my parents and if so is the tax relief claimed yearly or do we recieve it in the form of extra tax credits?

Hopefully this is not as complicated as I think it is! If anybody has any examples I would appreciate it.
 
As you got no answer yet I will do my best to explain. My family use this system to give extra money to an over 65 parent. In my case I made covenant to pay 2500 p.a., I then notionally deduct tax at 20% i.e. 500 and pay the 2,000 to parent. Parent is not liable for tax so applies to revenue for refund of this tax, as the 2,500 I covenented is no longer considered my income I am not liable for tax on it either but as I paid the money from my net income after 41% then I can apply for the difference between the 20% (500) that I didnt give parent and the amount of tax I did pay 41% (1,025) and I get back 525. Works best if person making covenant is in 41% tax but even if you are not the parent still gets to claim back their portion. Make sure you do not push the parent over the tax exemption limit or there is no benefit as they wont be able to claim the tax back. Dont know what they are talking about on the 5% reduction, there is a limit of 5% on the amount of your own income you can convenent. Hope this is clear, we claim it at end of each tax year, just got cheque today for parent of 1,300 being 2007 claim on 3 covenents.
 
I entered into a covenant with my mother 2 years ago for €400 gross (€320 net) per month. She's on an over 70's pension, clearing €237 a week after this budget. At the time we chose the amount so that it wouldn't put her over the tax free allowance limit. It now appears that she will lose her medical card because of it. Under what circumstances, apart from death, can a covenant be terminated?
 
AFAIK with the agreement of both parties or a nominated person. I know I have written into our agreement that it can be ended on the say so of another named sibling. Got that info at the time from Colm Rapple's finance book.
 
agapanthus said:
As you got no answer yet I will do my best to explain. My family use this system to give extra money to an over 65 parent. In my case I made covenant to pay 2500 p.a., I then notionally deduct tax at 20% i.e. 500 and pay the 2,000 to parent. Parent is not liable for tax so applies to revenue for refund of this tax, as the 2,500 I covenented is no longer considered my income I am not liable for tax on it either but as I paid the money from my net income after 41% then I can apply for the difference between the 20% (500) that I didnt give parent and the amount of tax I did pay 41% (1,025) and I get back 525. Works best if person making covenant is in 41% tax but even if you are not the parent still gets to claim back their portion. Make sure you do not push the parent over the tax exemption limit or there is no benefit as they wont be able to claim the tax back. Dont know what they are talking about on the 5% reduction, there is a limit of 5% on the amount of your own income you can convenent. Hope this is clear, we claim it at end of each tax year, just got cheque today for parent of 1,300 being 2007 claim on 3 covenents.
Click to expand...

Bit of a thread from the dead here but currently of interest. Reading (and trying to understand) the above. What is done with the notional €500 tax deduction withheld from the parent's payment. Is this paid directly to the Revenue by the child (to be claimed back seperately by the parent) ?

Is the €525 the child reclaims from the Revenue done so on their year end Form 11 (or equivalent) ?

If both of the above are correct surely the child would just end up with a net gain of €25- while the parent would get €2,500 (€2k from the child + €500 tax reclaim). Is there something I'm missing here ? (i.e. the child hangs on to the €500- notional tax to begin with).
 
Hi,

Yes, you hold on to the 500, it goes nowhere. Deed is for 2,500 - you pay 2000 to parent. Revenue then allow in your balancing statement the 500 as tax you have already paid, which the parent claims back. Parent gets 2k from you and 500 back from revenue. You, if you are on 42% tax, then get back credit in balancing statement for difference in tax paid (the 500) and actual tax that would be on 2,500 of your income at 42% as this income of 2,500 is no longer considered to be yours.

Even reading that it sounds complicated but it does work, I have just received my balancing statment for 2008 with refund and parent has received their refund as well. I claim it at end of each tax year, doesnt matter what way it is paid over the year once you have proof of payment.

There is no gain to you if you are on 20% tax rate, just gain to parent.
 
So do I read you right that you don't have to pay over the €500 only to claim it back at the end of the year but just hang on to it and fill out the necessary forms ? (or do you actually pay the revenue and reclaim). Sorry for beating this to death, just want to be sure.

Finally, I believe the deed has to be for a set period of at least 6/7 years ? Does the commitment to pay an amount each year have to be constant ? i.e. do you pick an amount for year 1 and stick to that amount our can you vary it up or down ?
 
You dont do anything with the 500, just fill it in on the covenant form as amount retained, you will have already paid it in tax (& more if you are on the higher rate) the adjustments will be shown on your balancing statement. The deed must be capable of running for the 7 yrs, afaik the amount remains the same, I dont think you can vary it, if you wanted to do that for some reason I imagine you would cancel the first one and start a new one. The optimum figure to pick is the one that does not put the parent into the tax net and is less than 5% of your income. If you push them into tax net then there is no benefit to them although you may benefit if on higher tax & as far as I remember amount of your income is limited to max 5%.
 
About to put this in place. Want to check I have it correct. I'm paying the higher rate of tax on my income.

DoC for €3,000 pa

I (the coventor) will pay the coventee €2,400 pa
The coventee will submit a copy of the DoC, Form 54 & R185 to the Revenue post year end to reclaim the difference, €600 (€3,000 @20% tax).
I (the coventor) can submit a Return of Income with the DoC and Form R185 to reclaim €630 (€3,000 @41% - €3,000 @20%).

Both parties receive a cheque for €600 & €630 respectively in the post.

Is this correct ?

Finally, do I submit a Form 54 seperate to my usual Form 11 or can I just mention the DoC in the Form 11 (because I can't find a section in the Form 11 relating to DoC).

Finally, finally, who can I get to witness the DoC, does it have to be a Solicitor or not ?

If anyone can help with any of this I'd be very appreciative.
 
Hiya,

You have it all pretty much correct, you can submit all your returns together, I thought there was some section though on the Form 11 that mentioned them as well. Dont have one handy to check, doubt if it will matter much.

Anyone can witness them, I just got work colleague.
 
Remember you must also submit evidence of payment, I usually send in bank statements from both to show the transfer of money or you could send copy of cheque you paid over.
 
Mucho thanks for that speedy reply and the advice re:supporting documentation.

I guess I was asking regarding the Form 11 in that the Form 54 seems to go into a lot of detail that would be replicated in the Form 11. I didn't want to have to fill out both. I'll have another look through the Form 11 for a DoC section.

Thanks again.
 
The above describes how I understood this to work. I set up a Deed of Covenant but have not claimed for it in the last 4 years and just submitted the forms.

Currently I give my mother €2000 each year by cheque. I filled out R185 with 2000 as the Net amount and €2500 as the gross amount. However the person dealing with my form says that I now need to pay the difference to the revenue i.e. €500 into revenue.

When I last claimed 5 years ago I do not recall having to do this.

Do I have to submit this to the revenue?

I'm not sure if I have this explained correctly.
 
Just submitting a claim myself at the moment, this certainly was not the case last year.

Surely the 500 has already been paid by you in tax as you have paid the 2,000 from your after tax income and the covenant changes the status of that gross 2,500 to no longer belonging to you as such and is dispersed by you giving the 2k to your mother and the revenue refunding the 500 to her is she is below tax threshold.

I presume you have had a taxable income in those years?
 
Hi wbbs,

Yes I did have taxable income in those years. I think I just got some one in the tax office who doesn't understand this.

To be fair, when I first filled out the R185 I was a bit confused too.

Thanks for confirming my understanding.
 
Just for avoidance of doubt about a €3k coveant:

- the 5% limit on ones income;
- you pay over the €3k minus standard rate tax
- you claim on your end of year where you get a deduction at top rate but account additionally for standard rate;
- you may be asked to prove you made the payment

The older person makes a claim within four years for repayment but effectively files a return Form 54 (may have other income sources)
 
Hey folks.

Can anyone tell me what happens if you fail to meet your obligations as a covenantor? I know the covenant must last 7 years, what if things have changed and you cant pay. Is there a clawback?
 
The wording says it must be capable of lasting more than six years, however it can be ended at any time with the consent of both parties. I can't find any reference to that on the revenue site but it was definitely in the paperwork I had, may have been part of the deed wording. Never heard of a claim back happening and I have personally finished one early.
 
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